CPCU 552 Test #2 (Ch. 7-8) Exam Questions With Revised Answers
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Course
CPCU 552
Institution
CPCU 552
CPCU 552 Test #2 (Ch. 7-8) Exam Questions
With Revised Answers
Describe the major functions of a corporation's board of directors. - answer• establish
corporate policy
• make major business and financial decisions
• appoint executive officers to manage daily operations
Describe the 4 fi...
CPCU 552 Test #2 (Ch. 7-8) Exam Questions
With Revised Answers
Describe the major functions of a corporation's board of directors. - answer✔✔• establish
corporate policy
• make major business and financial decisions
• appoint executive officers to manage daily operations
Describe the 4 fiduciary duties of the directors and officers of a corporation. - answer✔✔• duty
of care (with care that a person in a similar position would reasonably believe appropriate under
similar circumstances)
• duty of obedience (to the law - perform duties according to applicable statutes and terms of
corporate charter)
• duty of loyalty (best interest of corporation)
• duty of disclosure (must disclose material facts to all persons who have a right to know them
and wouldn't otherwise be able to obtain them)
Compare derivative and non derivative suits. - answer✔✔• derivative - brought by shareholders
in name of the corporation; damages go to corporation
• nonderivative - not made in name of corporation; may be initiated by customers, competitors,
employees, other people outside corporation
Describe a typical basis for class action lawsuits against directors and officers of a corporation
and provide an example of a common allegation. - answer✔✔• wrongful acts related to securities
• corporation's public statements contained material misrepresentations or omission
• alleged misrepresentation artificially inflated corporation's stock price
• insiders profitably sold their personal holding in stock while inflated
Discuss why corporations might settle claims against their directors and officers even if they
believe they have defenses to the claims. - answer✔✔defense costs and the amount of time
required to prepare an adequate defense can be devastating
Discuss how settlement of claims against a corporation's directors and officers can present
problems for indemnification of the directors and officers. - answer✔✔• indemnification under
common law required successful defense against suit
• when it is settled, it is terminated with no determination of wrongdoing
• not clear whether the directors and officers are entitled to indemnification
Discuss the reasons that risk control should be a central part of the management of directors and
officers (D&O) loss exposures. - answer✔✔• claims against D&Os can create significant defense
settlement costs
• D&O liability insurance cannot restore a corporation's reputation
• loss of reputation can damage customer relationships, hinder access to capital markets, and
make it difficult to attract highly qualified executives
What is covered by Coverage A of a D&O liability policy? - answer✔✔• insures individual
directors and officers
• indemnifies corporation's D&Os for covered claims only when it is NOT required by law, is
NOT permitted by law, or is financially prohibited b/c lacks of funds or bankruptcy
• limited to losses the corporation does not or cannot provide indemnification to the D&Os
What is covered by Coverage B of a D&O liability policy? - answer✔✔• insures corporation for
amounts it is lawfully permitted or required to pay to defend or settle claims against D&Os
• if a director is held liable for a loss caused by a covered wrongful act and the corporation is
lawfully able to indemnify the director, the loss will be paid under Coverage B
What is covered by entity coverage (Coverage C) of a D&O liability policy? - answer✔✔makes
the corporation itself (the entity) an insured for claims made against it because of wrongful acts
covered by the policy
Without entity coverage, to what extent is the corporation insured under a D&O liability policy?
- answer✔✔only covers corporation for indemnification of its directors and officers -- does not
cover any loss attributable to the entity's wrongful acts
Based on their definition of "claim" to what extent do some D&O policies cover criminal
proceedings against D&Os? - answer✔✔• some include criminal proceedings
• coverage is limited to defense costs b/c public policy bars insurers from covering criminal
penalties
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